Disposable income is the income left after you have paid the taxes on your monthly income. You need to manage your disposable income in such a way that after you have used a part of it, you are still left with money that you could either save or invest, and this portion of money is known as discretionary income. Both of these incomes are extremely important to manage your personal finance. Read this blog to know more about disposable income, discretionary income, the difference between disposable and discretionary income, and how to invest your disposable income.
What Is Disposable Income?
After taxes, a person’s or family’s disposable income is what’s left over. It is used for investments, discretionary spending, leisure activities, and necessities like food and rent. For example, your disposable income is Rs 25,000 if your monthly salary is Rs 30,000 and your tax payment is Rs 5000.
This money affects consumer spending, business earnings, and savings rates, making it important to the economy. Increased spending on products and services due to more disposable income often supports manufacturing and the state of the economy as a whole. Economic parameters like discretionary income, personal savings rates, and the percentage of income that individuals normally save or spend are also based on it.
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Formula for calculating Disposable Income
The formula to calculate disposable income is:
- Disposable Income = Personal Income – Personal Income Taxes
- For example, If Ram earns 30,000 Rs monthly (personal income) and the tax rate is 20%, then in this case his disposable income becomes 30,000-6000 =24.000. Where 6000 is 20% of 30,000.
Also read: What Is the 50/30/20 Rule and How to Use It?
Why is Disposable Income Important?
There are multiple reasons why disposable income is important. Here are a few of them:
- Financial Flexibility: People can choose how to spend their money if they have money to spend. Their ability to change allows them to both plan for the future as well as meet present requirements.
- Improved life Standards: Having more money to spend on hobbies, higher-quality goods and services, and participation in social and cultural events all contribute to a better quality of life.
- Economic Growth: Consumers who have more money usually spend it on goods and services. This expenditure improves the economy, promotes the creation of jobs, and increases financial growth in general.
- Savings and Investing: People who have disposable money can save and make investments. Long-term goals like retirement and education are made possible by savings. Investments give companies access to finance, which promotes growth in the economy.
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What is Discretionary Income?
The money that remains after taxes and necessary costs like rent, utilities, loans, and obligations is known as discretionary income. It’s included in disposable income, which is the amount of money that remains after taxes but before basic expenses are covered.
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Difference between Disposable Income and Discretionary Income
Disposable income is the amount of money that is left after you pay your income taxes and can be used for savings and spending. And the money left over after taxes and basic expenses are covered by an individual or a family to invest, save, or spend is known as discretionary income. Your disposable income is the source of your discretionary money.
Let’s understand it with an example:
Example: Let’s say you earn ₹100,000 monthly.
- Your Disposable Income is:
- After paying ₹20,000 in taxes, your disposable income is ₹80,000.
- And you Discretionary Income is:
- From your disposable income, you pay ₹30,000 for rent, ₹10,000 for utilities, and ₹10,000 for loans.
- So, your discretionary income is ₹80,000 – ₹50,000 (total necessities) = ₹30,000.
That means :
- Disposable Income: ₹80,000 (after taxes, before necessities)
- Discretionary Income: ₹30,000 (after taxes and necessities)
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How to Invest Your Disposable Income?
Once you’re left with your disposable income, you can put forth a certain amount of savings to invest either monthly or in a lump sum. These investments will help you create wealth and achieve financial goals in the long run. Here are some of the best investment options for your disposable income.
- Mutual funds: Mutual funds can be an ideal option for people looking to build a corpus via investing in Indian markets. Mutual funds can offer much higher returns than bank FDs and can be ideal to build funds for your children’s education in the future. Indian markets have outperformed global markets by min ~110% in the last decade allowing many investors to realize their financial goals.
- Systematic Investment Plan (SIP): Mutual Fund SIP investment allows both resident and NRI investors to start their investing journey with a small sum of money and build wealth in the long run. They are very simple and flexible as each month the fixed SIP amount gets debited from your bank account as per the SIP frequency and invested into the mutual fund SIP scheme that you’ve chosen.
- Bonds: Bonds are debt securities or financial instruments representing a loan made by an investor to a borrower. When you invest in a bond, you are essentially lending money to the issuer, which can be a government, municipality, corporation, or other entity. In return for your investment, the issuer agrees to pay you periodic interest payments, typically at fixed intervals, and return the principal amount at the end of the bond’s term, known as its maturity date.
- Real Estate: Real Estate is one of the top investment options for NRIs in India. It can be a form of retirement abode or an asset to bind the funds in. With the historical trend of immense growth and expansion, Real Estate has carved a separate niche for NRIs.
Also read: 10 Mutual Funds That Doubled Wealth In 5 Years
Wrapping up
For your financial planning, both disposable income and discretionary money are extremely important. As disposable income is the money you have left after you have paid the taxes, and discretionary income is what’s left after paying for all necessary expenses. Having disposable money improves your lifestyle of living by allowing you to make plans for the future and fulfill present restrictions. Having discretionary income promotes personal financial stability and economic growth by promoting savings, investments, and leisure spending. Also, managing both forms of income makes it easy for you to plan and manage necessities live stress-free financially, and put money aside for future spending.
Also read: Want to Build Funds for Retirement in India as NRI/OCI? Read This
Looking to Invest your Disposable Income in Indian Markets as NRI/OCI?
NRIs/OCIs can now download the SBNRI App and choose to invest in different NRI mutual fund schemes in India with ease. You can also get detailed investment advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
FAQs
Does disposable income include investment?
The money you have left over after paying your taxes is your disposable income, known as disposable personal income (DPI). It consists of the money available for investing, saving, and spending. That means, your disposable income is the amount that’s left over after you pay your taxes and this amount can be managed and spent by you.
How can you increase your disposable income?
To increase your disposable income, you can:
- Increase your income: Earn more money by getting a higher-paying job, getting a promotion, or finding additional sources of income.
- Reduce Your means of spending: Spend less by cutting unnecessary expenses and budgeting more efficiently.
When disposable income is zero?
- Low Income: Not enough money after essential expenses.
- High Taxes: A large portion of income goes to taxes.
- Debt Payments: High debt repayments leave no extra money.
- Unexpected Costs: Sudden large expenses can wipe out disposable income.
What is the 50-30-20 rule?
The 50-30-20 rule is a budgeting guideline that suggests:
- 50% of your money should go to essential needs (like rent and groceries).
- 30% should be spent on wants (like dining out and entertainment).
- 20% should be saved or invested for future goals (like retirement or emergencies).
- This helps balance spending, saving, and planning for the future.
